Environmental facilities and electric power were the two municipal bond sectors that showed the greatest percentage growth in issuance in 2019 from 2018.
The environmental facilities sector was up 90%, electric power grew 64.1%, and transportation expanded 35.6% last year from the previous year. These increases compare to a 22.3% overall increase for all municipal bond issuance.
As an explanation of environmental facilities’ growth, Jack Muller, vice president in the Citi Municipal Strategies Team, said, “Pollution control facilities and climate change protection are beginning to appear in the spotlight for many state and local jurisdictions and the municipal market is being seen as an effective tool to achieve environment-related goals.”
Bond Buyer Contributing Editor John Hallacy agreed that a heightened interest in environmental issues might have contributed to the growth.
Public facilities was the only sector that declined, falling 38.5%.
In terms of dollars, the sectors with the most growth compared to their 2018 volume were education with $28.5 billion, transportation with $18.4 billion, and general purpose with $10.4 billion.
Unless otherwise stated, all percentages are for par value change and are comparisons between 2019 and 2018. All statistics are from Refinitiv.
The biggest sectors by par issued were education with $111.6 million, general purpose with $97.6 million, and transportation with $70 million.
Electric power issuance was up 60% in 2019 from a year earlier. This was partly due to issues for nuclear power projects, which had seen a pause in issuance in 2017 and 2018, Muller said. He said he didn’t expect a “steady stream” of electric power issues to continue into 2020 because there are few nuclear projects.
Muller said the 34% jump in education issuance was because the sector benefited from the same factors affecting the overall jump: lower interest rates and the onset of taxable advanced refundings. “Higher education in particular saw a boost from the surge in taxable municipal issuance.”
“In the past it has been hard to resist the cheap financing available in the tax-exempt market, so universities have tried to meet these restrictions and borrow tax-exempt,” Muller said. “Now, with taxable rates so low, they are drawn in by the opportunity to construct buildings that will not have restrictions.”
Hallacy said the population growth of the Southeast and Southwest had contributed to the growth of education bonds.
In the healthcare sector, issuance for pediatric hospitals increased 354%. Hallacy said there has been a considerable amount of consolidation in the sector. This leads to the refinancing of the two parties’ debts. It is easy to do fundraising for pediatric hospitals and he said this might be a factor.
Hallacy said the 83% growth in the life care/retirement subsector of healthcare was due to the demand from a retiring Baby Boom generation. The sector is generally a high-yield and there’s a healthy appetited for these bonds right now, he said.
Muller agreed that the increasing number of elderly contributed to the growing issuance of bonds in the subsector and said this has been going on for several years.
In public facilities, the correctional facilities subsector contracted 44%, stadiums and sports complexes subsector plummeted 92%, and “other recreation” subsector slid 45%. “In the negotiations for the last round of tax cuts in Washington, there was discussion about outlawing tax-exempt stadium bonds altogether, and that seems to have quieted the sector somewhat,” Muller said. Hallacy agreed that a public turn against public financing of stadiums probably reduced bonding.
Mass transit funding increased 81% in 2019. Hallacy mentioned the New York Metropolitan Transportation Authority and Los Angeles County Metropolitan Transportation Authority as being active issuers in the year. The mass transit bond money is used for maintenance and expansions of systems.
Within the utilities sector, counties and parishes had a 164% increase from the year earlier. Hallacy said these governments had been waiting for particular federal water funds programs to be renewed and the federal government renewed them last year.
Many of these governments’ utility plants are getting quite old, Hallacy said. A final explanation is that many were paying more attention last year to the value of robust storm water systems. Hurricane Harvey’s impact in Texas in 2017 contributed to this.
Taking a longer-term perspective, housing issuance was up in 2019 by 70% from 2015. “Housing issuance has been on an upward path since 2011,” Muller said. “The decline in funding costs for state Housing Finance Agencies thanks to falling municipal yields over those years has made the business of issuing bonds and using the proceeds to provide mortgages a stable and profitable one.”
“HFA’s have also benefitted in the last decade from flat or rising front-end rates, as opposed to the years of the financial crisis when the Fed Funds rate was being cut,” Muller said.
Hallacy said that HFA’s now have an advantage because they can offer a lower cost than is available from others.
